Trust Receipts

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Columbia Law Review.

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NOTES.

Trust Receipts. — The trust receipt agreement is a kind of security
which is rapidly finding favor with bankers who make advances to
importers of merchandise. It is the custom for an importer to obtain
from his bank a letter of credit in favor of a foreign seller, who then
ships the goods consigned to the bank and draws on the bank for the
purchase price. On arrival of the goods, the bank, which now has
legal title to them, indorses the bill of lading to the importer, and
takes in return a trust receipt stating that the goods are received by
the importer as the property of the bank in trust to sell and devote
the proceeds to the payment of the advances made by the bank. The
object of the transaction is to permit the importer to take possession
of the goods and sell them so as to get funds to repay the bank's
advances without at the same time endangering its security.

434 COLUMBIA LAW REVIEW.

The courts are at a loss to determine under which of the recognized
classes of security arrangements trust receipts shall be grouped. It is
important to note as a starting point that, in nearly every case, the
agreement reserves the legal title to the goods in the banker until the
importer repays his advances, and the courts are unanimous in recog-
nizing this legal title and in protecting it. 1 Since, therefore, the
bank is the legal owner, it cannot be a cestui que trust, a pledgee, or a
legal or equitable lienor. 2 The idea of a pledge or lien is still further
negatived by the fact that the bank retains its security after parting
with possession of the goods. The transaction is unlike a factor's
agreement in that a factor simply remits to his principal a certain
percentage of the proceeds from his sales, s whereas the importer is
bound to pay the fixed purchase price which was advanced by the bank,
regardless of what he realizes from the goods. This process of elimina-
tion leaves conditional sales and chattel mortgages as the only forms of
security to which a trust receipt agreement is similar, but the authorities
are in conflict as to which of these transactions it is most like. 4

If it be a chattel mortgage, it must be recorded to be valid against
the creditors of the importer, 5 and this is also true of conditional sales
in many States. 6 Again, were it placed under either of those categories,
the fact that the debtor is permitted to sell and deal with the property
as his own would, in most jurisdictions, estop the banker from asserting
his title in the event of the importer's insolvency. 7 And yet the courts
have not only refused to apply the Recording Acts to these transactions, 8
but have also upheld the banker's rights against parties claiming under
the importer as judgment or attaching creditors,' lienors, 10 trustees in
bankruptcy, 11 pledgees, 12 and even an innocent purchaser for value of

"Notes 6-10, infra. In the case of In re Liberty Silk Co. (D. C. 1907)
152 Fed. 844, the trust receipt was couched in the language of lien, and
consequently was held void against the importer's creditors.

'See Burdick, Sales (3rd ed.) 34-35-

"See In re Penny & Anderson (D. C. 1909) 176 Fed. 141.

'Cf. New Haven Wire Co. Cases (1888) 57 Conn. 352; Charavay v.
York Silk Mfg. Co. (C. C. icoo) 170 Fed. 819; Moors v. Drury (1904)
186 Mass. 424; Williston, Sales, § 286, note 3. The Pennsylvania courts
get around their harsh rule that conditional sales are fraudulent, by
calling trust receipts bailments. Brown Bros. & Co. v. Billington (1894)
163 Pa. 76.

5 See In re Liberty Silk Co., supra.

"Williston, Sales, § 327; N. Y. Pers. Prop. Law, § 62.

'Cf. In re Garcewich (C. C. A. 1902) 115 Fed. 87; In re Antigo Screen
Door Co. (C. C. A. 1903) 123 Fed. 249; Elkus & Glenn, Secret Liens,
§ 195; contra, In re E. M. Newton & Co. (C. C. A. 1907) 153 Fed. 841.

'In re Reboulin Fils Co. (D. C. 1908) 165 Fed. 245.

"Mershon v. Moors (1890) 76 Wis. 502; Brown Bros. & Co. v. Billing-
ton, supra.

"Century Throwing Co. v. Muller (C. C. A. 1912) 197 Feb. 252; Barry v.
Boninger (1876) 46 Md. 59.

u In re Cattus (C. C. A. 1910) 183 Fed. 733; Roth v. Smith (C. C. A.
1914) 215 Fed. 82; but cf. In re Liberty Silk Co., supra.

"Moors v. Kidder (1887) 106 N. Y. 32. But this seems contrary to
the present New York Factor's Act, N. Y. Pers. Prop. Law, § 43. See
New York Security & Trust Co. v. Lipman (1899) 157 N. Y. 551.

NOTES . 435

the importer's claims against purchasers of the goods. 13 These decisions
may rest on a distinction which the courts have adopted with reference
to other consignment arrangements, which is that if the debtor is per-
mitted to sell the goods and treat the proceeds as his own, the retention
of title by the creditor is a fraud; 14 but if the agreement that the debtor
can sell require him to apply the proceeds in diminution of the debt
secured by the goods, the creditor's title will be recognized. 15 Or the
cases may rest on the broader ground that since trust receipt agree-
ments are well recognized in business circles as legitimate and neces-
sary to commerce, the courts will always strive to protect the banker's
title. 18 But whatever may be the reason, the fact remains that the
courts refuse to subject such agreements to the disabilities which are
imposed upon conditional sales and chattel mortgages, a fact which
seems to indicate that those courts are correct which distinguish them
from either. 17

Other questions arise apart from the validity of the bank's title
against claimants under the importer. In the recent case of Brown v.
Massachusetts Hide Corporation (C. C. A. 1915) 218 Fed. 769, the
trust receipt stipulated that the importer should hold the goods and
their proceeds as security not only for the payment of the debt for
those particular goods, but also for "any other indebtedness." Upon
the appointment of a receiver for the importer, the bank claimed that
some goods which the importer had already paid for should be treated
as security for other debts not yet due. The District Court disallowed
this claim, following the New Haven Wire Company Cases, 16 which
hold that the transaction is a conditional sale and that, therefore, as
soon as the importer pays for the goods and all debts then due, title
passes free from any lien for other debts. 19 The Circuit Court of
Appeals, however, rejected this doctrine and upheld the bank's conten-
tion. This decision is in harmony with the leading case of Charavay
v. York Silk Manufacturing Gom/pany, 29 in which also the court feels
bound to repudiate any idea of conditional sale in order to permit the
bank to reclaim and sell the property and then recover from the importer
any deficiency between the amount realized on the sale and the amount
advanced to the importer. As a matter of principle, it is submitted

v In re Dunlap Carpet Co. (D. C. 1913) 206 Fed. 726, affd. (C. C. A.
1914) 210 Fed. 156.

"Pontiac Buggy Co. v. Skinner (D. C. 1908) 158 Fed. 858; Mishawaka
Woolen Mfg. Co. v. Westveer (C. C. A. 1911) 191 Fed. 465.

"In re Perlhefter (D. C. 1910) 177 Fed. 299; In re E. M. Newton
& Co., supra. Ludvigh v. American Woolen Co. (C. C. A. 191 1) 188
Fed. 30, affd. (1913) 231 U. S. 522, enunciates this doctrine, but there
the debtor was merely a bailee who was permitted to sell the goods but
could return those which he was unable to sell, and was not bound to
pay for them. Such a bailment is very different from a conditional sale
or a trust receipt agreement, where the bailee of the goods is uncon-
ditionally bound to pay a fixed price for them. In re Wright-Dana
Hardware Co. (C. C. A. 1914) 211 Fed. 908.

"See Roth v. Smith, supra; In re Cattus, supra.

"In re Reboulin Fils Co., supra.

"Supra.

"Vaughan v. Massachusetts Hide Corporation (1913) 209 Fed. 667.

"Supra; cf. Earie v. Robinson (N. Y. 1895) 91 Hun 363.

436 COLUMBIA LAW REVIEW.

that here, as in the cases involving the validity of trust receipts, the
same results can be reached whether we call the transaction a condi-
tional sale or a mortgage. Since the retention of title by a conditional
vendor is merely to have security for the purchase price, the trans-
action is in its essence a mortgage. 21 This is evidenced by the fact that
the risk of loss of the goods is not on the seller, despite his legal title,
hut is on the buyer. 22 It follows that since a mortgagee is permitted to
foreclose and sell the property and then recover any deficiency from
the mortgagor, a conditional vendor should have a similar right. 23
The court in the Gharavay Case seems to fear that if a conditional
vendor retakes the goods he thereby destroys the consideration for the
debtor's obligation to pay and consequently cannot thereafter maintain
an action for the deficiency. But this difficulty is avoided if the
vendor reclaim the property, not as his own, but expressly for the
purpose of reselling on account of the buyer. 24 And finally, it is only
a logical extension of this analogy to permit the conditional vendor's
title to stand as security, not only for the purchase price of those
particular goods, but also for other debts as well if the parties so
stipulate. In such a case, the bank might be the legal owner of the
goods until they were paid for, and might thereafter have an equitable
Uen on them for other debts. 25

Equitable Conversion as Between Life Tenant and Bemainder-
man. — Where a life estate is followed by one or more remainders, the
testator is presumed to have intended to afford the remainderman a
substantial enjoyment of the property, and in the endeavor of the
courts to carry out this intention without prejudicing the life tenant,
perplexing problems often arise. In order to effectuate this supposed
intention, it has been found necessary in many cases to invoke the
doctrine of equitable conversion. Since the facts indicating the
testator's intention vary with each case, the theory is, however, often
difficult of general application. There is obviously no objection to
invoking the doctrine where there has been a specific testamentary
direction, mandatory in its nature, to convert realty into personalty
or vice versa, 1 without leaving any discretion in the executor or
trustee. 2 Where the trustee is given discretion as to the time or

"Williston, Sales, § 330.

Tiffany, Sales, 142-143.

"Prof. Williston, 20 Harvard Law Rev.. 370-371 and note.

"Perhaps this may explain the result in Drexel v. Pease (1892) 133
N. Y. 120, which is said in the Charavay Case to be inconsistent with
conditional sale.

a See In re Cattus, supra.

•McFadden v. Hefley (1887) 28 S. C. 317.

•Fisher v. Banta (1876) 66 N. Y. 468; Allen v. Watt's Exr. (1893)
98 Ala. 384. With the consent of the beneficiaries, the property may,
however, remain realty. This is said to constitute _ a reconversion, and
may be evidenced by a deed in which all the beneficiaries join, or by the
terms of the answer, Duckworth v. Jordan (1005) 138 N. C. 520, or by
a simple -indication of their intention to relinquish the right to an actual
sale. Howell v. Mallon (1899) 189 Pa. 169.